April 19, 2024
THE MARKETS
Packers are in a difficult position this week having waited until Friday with little to no inventory. Late day calls yesterday asking cattle owners to price cattle firm at steady money were refused. Purchasing cattle this morning at higher prices runs the risk of runaway futures causing instant repricing of cattle offerings and then chasing the market upward. The alternative is waiting until the close before moving but a friendly COF report could shut the gates until next week.
This week’s COF report will confirm the dearth of fed supplies for now and into the foreseeable future. The open question will be how much higher in price will consumers tolerate for beef cuts. Exports have proven to be resilient dropping by only 7-9% this year. Imports will be straight line higher and with the 90% lean setting new records each week, the trendline of increasing imports will continue.
The large decline in cow slaughter this year has notched a permanent dent in the weekly slaughter. This week’s slaughter at 603,000 was down 10,000 head from last week’s revised 613,000 head and down 8,000 head from last year’s 611,000. The fed cattle portion of the weekly slaughter is up however as cow slaughter continues well under last year. Processor’s margins continued to struggle with gains from lower cash prices insufficient to restore positive returns at the plant.
PRE-RELEASE CATTLE ON FEED
AVG RANGE
CATTLE ON FEED April ………………..102.0…………….101.6-102.5
PLACED DURING March ……………….92.1……………… 89.3-94.7
MARKETED DURING March ………….88.2…………….. 86.5-91.1
Cattle Futures. Futures strengthen for all months except the front end. Traders seem poised to take on speculative long positions but are waiting for signals to do so.
Benchmarking. On Tuesday of each week, USDA releases a weighted average price report for all cattle sold the previous week. The report summarizes the distributed price levels for each category of sale such as Negotiated/Formula/Forward Contracts. Beef producers are able to measure the marketing price for their cattle compared to the national averages.
The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week’s change in carcass weights and quality grading. The latest report shows carcass weights at 886# up 5# from prior week and 26# heavier than last year. Carcass weights will be fundamental in determining total beef production. The combined steer and heifer weights can easily be influenced when the proportion of steers to heifers in the weekly slaughter changes. Quality grade was down .1% at 84.40%.
The Weekly Steer and Heifer Grading Report is indicative of regional supplies of choice and prime cattle and often is determinative of regional differences is live price. The report is also reflective of the current status of fed cattle offerings in each area.
Forward Cattle Contracts: Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. The driver in forward purchases of cattle will always be forward sales of beef. Packers will always be willing to take a price risk off the producer’s plate in return for an extra margin.
Formula and Negotiated Grids. The Price and Distribution Report delineates the various selling methods and net results. The Cattle Contracts Report details the percent of contracts by volume of cattle and by number of contracts for selling cattle. Formula selling that was once the largest marketing method and still is, but is losing ground to negotiated grids where the premiums and discounts are set but the base price is negotiated.
Consumers are losing interest in premium beef products on the shelf at most supermarkets. The Never/Never antibiotic and hormone free high priced cuts are finding more difficulty in movement off the shelf. This in turn has forced mark downs for many of these products and threatened already thin margins. Wagu highly marbled steaks are also disappearing as consumers back away from luxury cuts.
The Cutout. Choice box prices were lower. Spring prices generally change the relationships between the various cuts. Traders will watch for signs of improvement in the middle meats as we push forward into spring and temperatures warm and cookouts increase. The workhorse in the cutout has been the 90% lean that has held up the entire cutout with super high prices as the cow slaughter slows. The watermark product to watch is the rib which has yet to show signs of a rally.
Replacement markets
With the recent declines in fed prices, closeouts at the feedyard level will be dipping into red ink. Optimism for the future and short supplies have been perfect conditions for overpaying for feeder cattle and calves. Feedlots profits almost always deliver optimism accompanied with feelings of power and invincibility. Those feeling must be punished prior to a restoration of sanity in pricing. The past two months have produced indications of a slow down in feedyard placements.
The drought map for the United States is revealing. This spring there are few spots in the country suffering extreme drought and the map shows a profile ideal for restoring the nation’s breeding herd. Improving genetics and heavier out weights for fed cattle will fill in some of the shortages in the beef industry but more animals are necessary to regain beef proper market share of the meats.
Market observers will begin to look for signs of a reduction in heifer placements on feed. This will signal the beginning of the herd rebuilding. Heifer retention also will reduce the calf pool available for grazing and growing. Conditions are now right for the rapid rebuilding of the nation’s cattle herd. The ommission of a breakdown by sex in the monthly COF reports by USDA is an oversight in need of correction.
Compared to last week: Steers over 700# and heifers over 650# steady. Steers under 700# and heifers under 650# 3.00-7.00 lower. Quality average. Demand moderate. Supply included: 100% Feeder Cattle (56% Steers, 42% Heifers, 2% Bulls). Feeder cattle supply over 600# was 72%.
OKC West —
Compared to last week: Steer and heifer calves that were long weaned with multiple rounds of shots sold steady to weak. Remainder of the offering traded 2.00-4.00 lower. Demand moderate to good. Supply included: 100% Feeder Cattle (56% Steers, 43% Heifers, 2% Bulls). Feeder cattle supply over 600 lbs was 15%
Feeder Cattle Futures. The feeder contracts moved higher in front of the COF report.
The lack of liquidity in the feeder contract provides a perfect environment for prices to move too far in either direction. Poor liquidity leads to extreme volatility. Overdone directional price movements frequently require corrections and traders sense the vulnerability of the contract that needs to be cash settled but the contract index needs a redo.
Feeder Cattle Cash Index. The index is tracking the moves in cash prices.
Video and Internet Replacement Cattle Auctions. The movement from traditional private treaty sales to Internet auctions has been slow but steady. Producers have chosen this option as the primary marketing tool for most of the cattle offered in the replacement markets.
National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.
Grain Futures. Grain prices were lower. Some feedlots have put wheat into the ration and more will if the relationships change. Continued substitution of wheat for corn will increase the corn carryover and reduce the summer basis for corn. Corn basis offerings in Guymon, Oklahoma are at $1.35 — basis the May contract.
WHAT ARE THE FUNDAMENTALS?
Pages of analysis are filled with commentary about how outside forces are acting on the cattle futures and those forces have little or nothing to do with the price of beef. This past week was an example of news stories, outside the normal supply/demand picture for beef, having major implications to the cattle futures market. The series of news stories were on the front pages of most publications and many of the articles never mentioned beef. First a couple weeks ago we had Bird Flu spreading to dairy cattle then one human. Then came disappointments over the Fed intentions to lower interest rates, then a bad inflation report and finally a war scare.
Those choosing to disregard those stories and the reaction in the livestock futures as meaningless, will soon be humbled by the power of economic or political news and its impact on food prices. Credit card debt is rising and default rates on credit card debt are on the increase. Those facts have a direct bearing on consumers’ ability to spend. Rent or home payments, fuel, and food are the major components of a household budget and evidence is mounting that household budgets are being squeezed by high interest rates and inflation. Rent and gas are not optional but food choices are.
Food scares have always been part of the matrix directly impacting the demand side of the beef business. Because the United States alone has no Mandatory ID system for cattle, tracking and tracing the scope of a health event is difficult if not impossible. The reaction of the States to this flaw in our infrastructure is to ban interstate travel for animals from an affected State where a disease has been identified as was announced this past week. This in turn devalues the animals in commercial value.
Finally, the role of computerized trading systems shortens the reaction time in the marketplace. Orders are created and executed in nanoseconds and sometimes those orders overwhelm the market and trigger other technical orders or stops, magnifying the result. This creates volatility and volatility brings in the momentum traders who may have a position only for the day but ride the directional wave until it stops.
Ignoring the many extraneous factors in a market is shortsighted and often dangerous to sound risk management. Some of those factors may be irrelevant and others flat out wrong, but within each factor lies a risk component that must be evaluated and considered. They are often as fundamental as the number of cattle on feed or other straight forward data points.
CATTLE REPORT LIBRARY
Change is a necessity for any sustainable industry and sometimes necessary changes encounter obstacles in the form of stalwarts who refuse change. The Cattle Report has created a library page of opinions pieces published on these pages advocating fundamental and structure changes for the industry.
NOTE TO READERS
Sections of the newsletter are designed with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.
EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES
Regional differences in grain and cattle basises create a difficulty in modeling a national composite for current close outs or a proforma forward look at a breakeven. Readers should consider your own area for adjustments to these models. Most calculations are basis relevant prices in Guymon, Oklahoma.
CURRENT BREAKEVEN PROJECTION
The Cattle Report introduces the FEEDER METER. The report estimates profit or loss for currently purchased feeder steers and projects a result 180 days out. The chart is interactive and updated every 15 minutes in real time based on changes in futures markets in grain and cattle. Corn basis information is based on current trade prices adjusted every two weeks. Feeder prices are based on the USDA index price for 800# steers and fed cattle sales are $2 cwt. premium the appropriate futures contract.
CURRENT CLOSE OUT
The Cattle Report estimates current profit or loss on cattle placed on feed 180 days ago. This report generated from industry averages attempts to simulate a typical close out based on the feeder index for 800# steers 180 days ago. The close out assumes grain was purchased at market each month. Selling prices and interest rates are based on prevailing benchmark quoted prices. This chart will change weekly.
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